Lesson 9 of 10 · All lessons in this module
- Why appraisal is harder: the life cycle and the J-curveVideo lesson
- Measuring returns: IRR versus MOICVideo lesson
- Leverage: magnifying gains and losses
- Valuation: fair value levels and smoothed returns
- Fees, custom terms and redemption provisions
- Hurdle rates, catch-up, waterfalls and clawbackVideo lesson
- High-water marks, investor timing and either/or feesVideo lesson
- Integrated case: hurdle rate and high-water mark in one fee
- Integrated case: three investors, one fund, four years
- Funds of funds, benchmarks and index biases
Lesson 9 of 10 · 15 min
Integrated case: three investors, one fund, four years
A high-water mark is tracked per investor, so one fund with one series of gross returns pays different incentive fees to investors who entered at different times, and the highest net return can belong to the earliest or the latest entrant.
In short
- Build one track per investor. Each starts at its own entry date and its own mark, equal to the amount invested.
- Each year: gross value → management fee → value after the fee → incentive fee on the excess over that investor's mark → ending value.
- The mark moves only when an investor's ending value after fees sets a new peak. A loss year never lowers it.
- Compare investors on cumulative net return from their own entry date; the same gross returns give different results.
- An early entrant keeps the early gain but pays no incentive fee until the mark is regained; a late entrant skips earlier losses but pays on the whole recovery.
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